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Regime interplay in public-private governance: taking stock of the relationship between the Paris Club and private creditors between 1982 and 2005.

Despite new interest in the implications of growing institutional density for international cooperation, and in so-called public private governance, the interplay between public and private regimes has so far been largely overlooked. This article draws on the emerging literature on parallel regimes in international governance to analyze the evolution of the norms and rules governing sovereign debt restructuring from the early 1980s to the mid-2000s, with a particular focus on the interplay between those covering official bilateral (or Paris Club) debt, and those dealing with private credits. It shows how, from the mid-1990s onward, changes in market and political environments turned burden sharing between bilateral and private creditors into a contentious issue, partly undermining the existing framework for public-private cooperation, and confirms that a focus on institutional interplay can help identify some of the key dynamics behind public-private cooperation. Keywords: parallel regimes, institutional interplay, public-private governance, sovereign debt restructuring, Paris Club.


Acknowledging the multiplication of international agreements and norms, scholars have begun to question the implications of growing institutional density for international cooperation. (1) Concepts such as regime overlap, nesting, or regime complex have been developed to attempt to account for the phenomenon, and explore its consequences. Yet while the interplay between state-led regimes has attracted rising scholarly attention, that between private regimes, or between state and private regimes, has remained virgin territory, despite early calls for a thorough analysis. (2) In light of the growing interest in issues relating to public-private governance, the fact that the interaction between state and nonstate sets of principles, norms, and rules has largely been overlooked seems especially puzzling.

One reason might be the lack of a clear line between state and nonstate. Virginia Haufler identifies a private regime "as one in which co-operation among private actors is institutionalized, and in which states do not participate in formulating the principles, norms, rules or procedures which govern the regime members' behaviour." (3) However, private regimes, like their exclusively state-led counterparts, are best seen as one end of a continuum along which the proportion of state and private influence varies. In some areas, regimes are created by states on private foundations (e.g., human rights); in others, regimes are established by private actors under the watchful eye of the state (e.g., maritime insurance or Internet access). In yet others, state and private actors share in the definition, implementation, and monitoring of norms and rules (e.g., intellectual property rights or the Basel II framework).

Yet when focusing on the two ends of the continuum (i.e., contrasting primarily state-led and primarily private-led institutional arrangements), important differences emerge that may influence institutional design and evolution. In particular, whereas market actors are primarily accountable to their shareholders and investors and therefore must obey commercial imperatives, state actors are subject to electoral accountability and their decisions tend to reflect geopolitical considerations and domestic political pressures. How these differences impact the interplay between public and private regimes, creating synergy or conflict, is thus of major interest.

Drawing on the emerging literature on parallel regimes in international governance, I analyze the evolution of the bilateral and private regimes for sovereign debt restructuring from the early 1980s to the mid-2000s, with a particular focus on the interplay between the two. As will be shown below, the existence of different sets of norms and practices governing official bilateral and commercial debt first attracted scholarly interest in the 1980s, with the Latin American debt crisis. Following the Argentinean debacle of 2001 and the 2003 shelving of the International Monetary Fund (IMF)-sponsored proposal for a Sovereign Debt Restructuring Mechanism (SDRM), the complex relationship between sovereign debtors and their creditors has enjoyed renewed attention. (4) However, the interaction between the Paris Club of official bilateral creditors and private investors has been largely neglected, as have the implications for sovereign debt restructuring of their coexisting regimes. (5) Some political economists simply assume an identity of interests between bilateral and commercial creditors, based on the fact that the majority of private financing to emerging markets originates from Group of 7 (G7) countries, who also happen to be the world's main providers of official bilateral credit. (6) Others adopt a compartmentalized approach to sovereign debt governance, in which the rules governing bilateral and private debt workouts are analyzed separately. In doing so, all seem to overlook both the potential for severe distributional problems between the two groups of creditors, and the way their norms and practices differ and interact. Yet these have significant implications for the mechanisms and politics of sovereign debt management.

By focusing on the interplay between official and private rules and norms over two periods, 1982--1995 and 1995--2005, this article sheds new light on the conditions for, and limits to, public-private cooperation in the area. It also confirms that emerging work on institutional linkages can make a fruitful contribution to the study of public-private governance, by bringing to attention some of the key dynamics underlying effective cooperation between state and nonstate actors and potential obstacles thereto.

Regime Interplay in Sovereign Debt Restructuring

Students of sovereign debt governance have tended to concentrate on either official debt or private credits. Accounts of the evolution of the rules and processes governing the restructuring of official debt have thus focused on geopolitical considerations or the impact of social movements and domestic opinion. Private sector rules, on the other hand, have generally been regarded as shaped by market forces, although G7 governments have at times intervened to alter private lending and restructuring in a sense conducive to their policy agenda, most notably in the 1980s with the Baker and Brady plans. (7) Little attention has been paid to the ways in which official and private norms and practices have coexisted.

Yet from the late 1970s onward, the area can be fruitfully conceptualized as comprising two distinct, interrelated regimes: one centered on the rescheduling of official, mostly bilateral debt, with the Paris Club as its key coordinating mechanism; the other dealing with the rescheduling of private debt. These regimes are parallel: separate, nonhierarchical, and in the same issue area. (8)

Regime Interplay

Of particular importance here is the fact that the two regimes are in interplay; that is, the contents, operation, and consequences of one are significantly affected by those of the other. (9) Other things being equal, the greater the amount of official financing received by a debtor country (whether in the form of aid or debt rescheduling), the greater the country's capacity to meet its payment obligations to private creditors. Conversely, the more concessions debtors receive from their commercial creditors (whether in the form of new loans or debt restructuring), the lighter the restructuring burden on official ones. Interplay between the bilateral and the private sovereign debt restructuring regimes is therefore likely to be strong in the case of those debtors (usually middle-income countries) in a position to draw on both private and government financing, especially at times of widespread financial crisis when debtor and creditor resources become stretched. The resulting tensions between official and private actors could complicate the adoption and implementation of collaborative approaches.

The risk of allocative tensions leading to conflict is further compounded by two factors: uncertainty and different actor priorities. First, it is quasi-impossible to measure the amount of debt relief granted to a particular country under each regime over an extended period of time, due to differences in the deals concluded, the possible granting of new money by commercial actors or soft loans by public ones, and, in many cases, the difficulty of establishing how much debt was owed in the first place. Second, while private creditors are driven primarily by commercial goals, bilateral creditors can also obey domestic or foreign policy considerations, extending favorable restructuring terms to valued partners as an alternative to (or in conjunction with) aid. In such cases, official assistance could be "diverted" by debtors to repay private creditors. Differences in creditor objectives and institutional constraints (e.g., accounting rules or parliamentary oversight) might also account for significant normative inconsistencies between the two regimes, possibly weakening the compliance pull of one or both of them. Conversely, functional similarities might lead to a measure of cross-regime emulation, as innovative approaches to sovereign debt workouts in one regime lead to corresponding innovations in the other.

Interplay Management and Institutional Politics

How quickly interregime conflicts are resolved depends on both contextual and regime-specific factors: for instance, general economic conditions might improve, thereby reducing allocative tensions; or market restructuring may modify constellations of interests. Most important, key individuals and organizations may work actively to foster cross-regime cooperation, normative alignment, or the adoption of "collision rules" such as rules of preeminence and policy diffusion. In doing so, however, they may be concerned with more than restoring harmony and cooperation, and seek to exploit institutional linkages as strategic opportunities.

Oran R. Young thus sees in the politics of institutional linkages "a complex mix of efforts to enhance social welfare and to promote the interests of individual participants." (10) Similarly, Olav Schram Stokke points to the importance of interplay management; that is, "deliberate efforts by participants in tributary or recipient regimes to prevent, encourage, or shape the way one regime affects problem-solving under another." (11) Of particular interest here is the way in which regime participants, whether bilateral creditors or private lenders, might resort to interplay management in order to advance their agenda. (12) By investigating the processes and outcomes of such institutional politics. I hope to shed new light on the blend of cooperation and conflict that characterizes sovereign debt governance.

In the next section, I show how the arrangements governing the restructuring of bilateral and commercial debt interacted from the early 1980s to the mid-1990s. I then relate changes in the regimes' economic and political environments to the rise of new tensions and approaches to interplay management following the 1994 Mexican crisis. A fifth section concludes.

Muted Tensions, 1982-1995

By the time Mexico defaulted on its debt in 1982, the Paris Club had only recently established its monopoly over the multilateral restructuring of official bilateral debt, and its private equivalent, the Banking Advisory Committee (BAC) process--also known as the London Club--was barely emerging. Yet over the following decade both helped restructure unprecedented amounts of sovereign debt, getting solidified in the process. That they did so without serious conflict between their key actors can be largely assigned to well-contained negative externalities and to the work of a tight network of public and private officials aligned around common objectives.

The Paris Club: From Emergence to Codification

First established as a pragmatic solution to bilateral payments imbalances in the mid-1950s, the Paris Club gradually developed strong norms, rules, and procedures, further codified in the early 1980s following intense criticism by the G-77. According to the conditionality norm, debtors were expected to conclude an agreement with the IMF as a prerequisite to Paris Club negotiations. The comparability of treatment norms meant that debtors were expected to seek comparable relief from all their various creditors, with the notable exception of the multilateral financial institutions, whose debt was deemed to be senior, and bondholders, generally regarded as de minimis creditors. (13) The third norm related to creditor solidarity: decisions regarding restructuring had to be taken by consensus. (14)

The main rules governing Paris Club operations concerned imminent default because only cases of countries having actually defaulted on debt service payments or being on the verge of doing so would be considered; new money because the Paris Club would not provide new financing, but only reschedule existing debt; and, finally, flow treatment and debt reduction: the Paris Club would consolidate the payment of principal, and sometimes interest, falling due during the consolidation period, but would leave the old debt intact. In the late 1980s, the difficulties encountered by a group of (mainly African) highly indebted poor countries led to the adoption of a series of terms granting increasingly concessional rescheduling, starting with the 1988 Toronto terms. More generous, nonconcessional terms followed for lower-middle-income countries, with the 1990 Houston terms. (15) But stock-of-debt treatment remained officially out of bounds.

As for Paris Club procedures, they were initiated once the French Treasury received a formal request for debt restructuring from a debtor. (16) The French chair would negotiate with the debtor country on behalf of the Paris Club members on the basis of an agreed mandate subject to continuous review through parallel discussions among the creditors, the number and identity of which varied on a case-by-case basis. Important here, the magnitude of debt restructuring to be achieved was determined on the basis of the balance-of-payments financing gap calculated by the IMF, with only the terms of repayment to be negotiated.

The London Club: A Set of Conventions

Like the Paris Club, the London Club grew organically, out of commercial bank negotiations with a handful of debt-distressed countries between 1976 and 1981. However, it had neither a fixed membership nor a secretariat, emanating from the creation of ad hoc bank advisory committees, steering committees, and coordinating committees comprised of the representatives from banks with large exposures to the debtor country concerned. Still, coherent and enduring norms and procedures emerged to guide private debt workouts, "normative institutions involving a stabilized pattern of behaviour of a given number of actors in recurring situations." (17) One can therefore rightly speak of a private regime.

Two core norms seem to have guided London Club operations in the 1980s. The first one concerned fair treatment: each bank was expected to participate in debt restructuring in proportion to its existing exposure. (18) The second norm dealt with conditionality: debtors had to be willing to seek an agreement with the IMF as a prerequisite to London Club negotiations. The emphasis here is on "seek," though: in sharp contrast with the norm in vigor among official creditors, negotiations were often concluded before the debtor country had reached an agreement with the Fund, and clearing interest arrears before the conclusion of the negotiations was regarded as equally important.

As for key rules, they spelled out an approach best defined as case by case, voluntary, and market based. Repayment terms were linked to the debtor's capacity to pay, as determined by quantitative analysis; and new money was generally included in consolidation packages. It is worth noting that imminent default was not a key condition in the BAC process, with commercial bankers willing to engage in preemptive rescheduling. (19) Neither was stock-of-debt treatment ruled out a priori, although banks remained wary of creating precedents until the late 1980s. Also noteworthy was the fact that, whereas in the case of the Paris Club, the costs of the negotiations were largely borne by the French Treasury, in that of London Club discussions, they were borne by the debtor.

Normative Inconsistencies

Because they emerged in response to similar difficulties, and because the architects of the BAC process seem to have drawn some inspiration from that of the Paris Club, the 1980s official and private regimes for sovereign debt restructuring presented important commonalities, arguably resulting in a measure of positive normative reinforcement. Thus, one could see the determination of official and private creditors to negotiate with individual debtors only as mutually reinforcing. The conditionality norm common to both regimes also served to enshrine the role of the IMF in debt restructuring, even though the signature of an IMF agreement was only a strict precondition in the case of the Paris Club. More generally, official and private creditors shared a reluctance to move to a statutory approach to sovereign debt restructuring, for instance, by inscribing the doctrine of odious debt in public international law. (20)

Still, there were also significant differences, which could result in conflicting interplay. The swiftness and cost-effectiveness (especially from the debtor's point of view) of the Paris Club process thus reflected rather badly on its private counterpart, helping to fuel periodical demands by debtor countries for a "fairer" split of the private sector bill. Paris Club refusal to commit new lending as part of its debt restructuring package, in contrast with commercial practices, could also complicate efforts to achieve appropriate burden sharing between the two groups of creditors. (21)

Most significant, the London Club allowed for stock-of-debt treatment, at least on principle, whereas the Paris Club would permit only flow rescheduling. The reasons behind official lenders' reluctance were several. Some they shared with their private counterparts, like attachment to the principle of the sanctity of contracts and the fear to open the door to unstoppable debtor pressure. Others reflected the different set of constraints that official actors were being subject to: in a number of key countries, and notably the United States, budget accounting rules made debt reduction a cumbersome and politically sensitive approach. (22) As middle-income countries began to achieve debt reduction in their dealings with private creditors in the late 1980s (Costa Rica and Bolivia in 1987, Mexico in 1988), the discrepancy with Paris Club treatment became obvious. Even in the context of Brady deals, with the official community now encouraging debtors to reach an agreement with their private creditors that would feature debt and debt service reduction, Paris Club creditors remained unwilling to consider debt relief. (23) This created the risk of reduced willingness on the part of some private investors to extend new credits, thus weakening the compliance pull of private rules.

Limited Externalities and a Flexible Collision Rule

Yet tensions between bilateral and private creditors remained muted. In Brady deals in particular, commercial banks did not demand that debtors seek comparable debt and debt service reductions from their official creditors. (24) For Lex Rieffel, "they understood that more money would flow from bilateral donor agencies if they did not have to accept outright losses." (25) Limited negative externalities also need factoring in because the banks' major Latin American clients owed comparatively little to foreign governments, with the relative exception of Brazil. (26) Observers have also noted a general congruence between bilateral and private interests: most Paris Club debt related to trade finance guaranteed by export credit agencies; the efforts of bilateral creditors to recover those loans not only benefited public accounts, but also the banks that had channeled them, and thus enjoyed an implicit public guarantee.

As for the potential impact of negative externalities on bilateral creditors (and, by extension, taxpayers), it was limited through the implementation of the Paris Club norm of comparable treatment, which in the late 1970s emerged as a proper collision rule, establishing the preeminence of official decisions in the matter of allocation. (27) Taking into account differences in instruments and terms, the emphasis was on comparability, not uniformity. Care was also taken not to insist on an overly strict approach, as this could have made private investors more reluctant to provide new loans in the future. Thanks to this flexibility, the rule seemed to work well over the period, even if misalignment between official and private objectives could occasionally be an issue as when, in April 1991, Poland was rewarded for its role in contributing to the end of the Cold War by a highly exceptional 50 percent reduction in net present value terms on its outstanding Paris Club debt, a reduction that private creditors found themselves under pressure to match by virtue of the norm on comparable treatment. (28)

A Cohesive Network and a Powerful "Broker"

Overall, however, bilateral and private creditors seemed to share a common understanding of comparable treatment, the latter essentially accepting the preeminence of Paris Club decisions. That they did so may be partly related to repeated interactions between public and private actors. Over the period, a few key individuals appear to have worked especially hard to keep public and private interests in line. These included managing directors of the IMF, Jacques de Larosiere and Michel Camdessus; Paul Volcker and his associates from the US Federal Reserve; chairman of Citibank, William Rhodes; and chairman of the Paris Club, Jean-Claude Trichet, whose phone calls to select banking partners seem to have played a significant, if informal, role in smoothing the relationships between bilateral and private creditors.

Finally, and most important, despite being only an observer of Paris Club and BAC operations, the IMF became closely involved in the management of regime interplay. First, by providing its medium-term balance-of-payments projections to both official and private creditors, it was in a unique position to frame the discussions on how much debt to reschedule and how best to do so. Lacking the necessary staff resources to conduct its own analyses, the Paris Club was especially reliant on IMF assessments and intelligence. (29) From 1982, the IMF also played an active role in constructing overall financial packages for debtors, making the signature of a stabilization package conditional upon meeting a prescribed level of commercial lending, and asking bilateral creditors to match the effort of private creditors taking into account their respective exposures. Insistence on "concerted lending" was relaxed under the 1989 Brady plan, when the emphasis shifted to voluntary debt reduction. However, through its balance of payments projections, the IMF continued to set the necessary level for private sector involvement, which the Paris Club then translated in its own restructuring agreement in the form of the comparability of treatment clause.

From Conflict to Cooperation, 1995-2005

Whereas the 1980s had seen the strengthening of two parallel regimes for sovereign debt restructuring, developments in the 1990s called their future into question (see Table 1). On the one hand, the growing importance of private capital flows to emerging markets and a belated shift to debt reduction led observers to predict the end of the Paris Club regime. (30) At the same time, the rise of bond financing transformed the private landscape. When middle-income countries began experiencing renewed financial instability in the mid-1990s, the implications of these developments for regime interplay became obvious, also affecting approaches to interplay management.
Table 1 Net Financial Flows to Developing Countries, 1995-2005 (in
billions of dollars)

 1995-1997 1998-2000 2001-2003 2004-2005

Net private flows 261.0 192.0 202.6 481.9
Equity investment, net 175.0 181.8 174.6 302.6
Foreign direct investment 136.7 171.5 162.7 249.3
Portfolio 38.3 10.3 11.9 53.3
Private creditors, net 86.0 10.2 28.0 179.3
Bonds 47.5 29.9 15.1 47.5
Banks 36.2 13.4 8.2 68.3
Net official flows (a) 41.6 57.9 59.1 22.2
Official creditors, net 12.5 14.5 6.5 48.6
Total net financial flows 302.7 206.5 209.1 433.3

Source: World Bank, Global Development Finance (Washington. DC: World
Bank, 2002, 2007).

Note: (a.) Including aid and debt.

Paris Club: From Debt Rescheduling to Debt Reduction

In the late 1990s and early 2000s, the official regime for sovereign debt restructuring underwent a number of changes. Some of them appeared to be rather cosmetic: thus, by 2001, the rule related to imminent default was no longer listed among the key "principles" of the Paris Club; instead, the need for a case-by-case approach was explicitly stated, thus bringing the official approach in line with the private mantra.

More significant was the weakening of the rule on stock-of-debt treatment and debt reduction. Whereas previously agreed terms allowed for only the reduction of debt payments falling due, the 1994 Naples terms opened the way for the write-off of the residual stock of debt, regardless of maturities. The 1996 Debt Initiative for Heavily Indebted Poor Countries (HIPC) followed, together with its 1999 enhancement, through which the bilateral and multilateral debts of a select group of heavily indebted poor countries (HIPCs) were further reduced. Finally, the adoption of the Evian approach in October 2003 established a new framework, in which non-HIPC countries deemed to possess unsustainable debts could benefit from an "exit treatment," including flow treatment, stock reprofiling, and, if appropriate, stock reduction. (31) By May 2006. nine countries had been granted debt treatment under the Evian approach, three of which (Iraq, the Kyrgyz Republic, and Nigeria) with significant stock-of-debt reduction.

As regards procedures, membership became fixed, although non-members continued to attend on an occasional basis, and the adhesion of Russia in 1997 brought the number of members to 19. (32) Moreover, responding to growing calls for greater transparency in international debt governance, the Paris Club launched a website explaining its principles and rules and giving details of its operations in April 2001.

The BAC Process in Question

While the Paris Club was undergoing a number of significant evolutions, the private regime seemed in a state of flux. In the 1980s, private creditors had formed a relatively homogeneous group. By the late 1990s, private interests had become more fragmented. Bondholders such as investment funds, pension funds, or insurance companies were more interested in immediate gains due to the mark-to-market valuation of their portfolios and, in the case of so-called vulture funds, would not hesitate to launch proceedings against debtors to maximize returns, compounding the collective action problem inherent to debt restructuring. A further cleavage emerged between underwriters and the investment banks advising sovereign issuers, the latter competing for remunerative advisory mandates to carry out unilateral exchanges. The validity of previous rules and procedures was called into question, and efforts made to reassert some while updating others.

Having taken upon itself to provide leadership for the sector as a whole, the bank-based Institute for International Finance (IIF) thus insisted in its 2001 Principles for Private Sector Involvement in Crisis Prevention and Resolution that restructurings ought to proceed on a case-by-case, voluntary, market-based basis, and be supported by "firm and visible commitment to a strong adjustment programme" (i.e., conditionality). The norm of fair treatment was also evident, albeit in a form that now encompassed bondholders. (33) Significantly, the same norms underlay the subsequent IIF's Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, endorsed by the G-20 (minus Argentina) in 2004, though the practical significance of this new framework for cooperation between sovereign debtors and their creditors remained disputed. (34)

However, adapting procedures to the new environment proved difficult. BACs were relabeled advisory committees or creditor groups and, in some cases (e.g., Cote d'Ivoire and Congo) broadened to include bondholders. The Global Committee of Argentina Bondholders (GCAB) and, in the Iraqi case, the London Club Coordinating Group (LCCG) showed private creditor dispersion could be tackled with some measure of success. By 2006, there were even hopes that the combination of spreading collective action clauses (CACs) in bond contracts and the IIF's 2004 Principles would pave the way for stronger, more inclusive creditor committees. (35) However, the Argentinean and Iraqi cases, where debtor governments simply refused to engage with private creditor groups, suggested serious limits to IIF efforts as did lack of enthusiasm for IIF leadership among sections of the financial services industry. (36)

New Tensions

Tensions increased significantly between official and private actors after 1995. The size of the official bailout of Mexico left many G7 observers with a sense that the official sector had done too much and private creditors too little. In turn, private creditors soon pointed to significant losses in East Asia and Russia, rejecting suggestions that they had been bailed out. The forced bond restructurings of 1999 brought matters to a head.

In January 1999, a Paris Club rescheduling agreement with Pakistan was signed, which included for the first time a provision explicitly extending comparable treatment to three Eurobond issues with about $600 million outstanding. (37) As a result, Pakistan ended up restructuring the bonds through a unilateral exchange, much to the dismay of its own officials who feared the country would be shut out from international financial markets. (38) A few months later, Ukraine, under pressure from the IMF to seek new commercial financing to cover its bond payments, also carried out a unilateral exchange. It was soon followed by Ecuador, which became the first country to restructure its Brady bonds. The Framework for Private Sector Involvement produced for the 1999 G7 Cologne summit confirmed that "the Paris Club principle of comparability of treatment applies to all categories of creditors other than the international financial institutions." (39) Bondholders were no longer immune from the negative impact of utilitarian interplay.

In turn, the Paris Club became the "lightning rod" for private complaints of official sector bail-in policies, with particularly virulent attacks centering on the cases of Russia, Pakistan, and Ecuador. (40) By September 2000, the editorial of Institutional Investor magazine read: "Paris Club: Reform or Die." Even veteran debt negotiator Bill Rhodes was adamant that "the Paris Club does not live up to its own insistence on comparability." (41) Significantly, the issue of normative discrepancies relating to debt treatment finally came to a head: taking stock of the growing occurrence of unilateral exchanges, some among private creditors began to call for reverse comparability, under which debtors having obtained debt and debt service reduction from private investors would seek comparable reductions by the Paris Club. (42) Should these not materialize, they warned, and the debt burden be forced onto the private sector, the willingness of private investors to expend new credits might be compromised. Such calls were unequivocally rejected by bilateral creditors, who continued to limit such operations to low-income countries. (43)

Then came deputy managing director of the IMF Anne Krueger's proposal for a Sovereign Debt Restructuring Mechanism, in November 2001, prompting the immediate opposition of private investors. That private sector fears regarding the proposed framework were, at least in part, a reflection of the new, more conflictual interplay between private and official regimes is apparent in the Emerging Markets Creditors Association (EMCA) director William Ledward's critique of the SDRM as being "nothing more than a device to protect the IMF's own claims and those of other public sector creditors at the expense of private creditors." (44) That the proposal did little to assuage those fears is just as obvious: the decision to exclude Paris Club debt from SDRM operations attracted scathing private sector criticism, the so-called gang of seven private sector associations (IIF, EMCA, Emerging Markets Traders Association [EMTA], International Primary Market Association [IPMA], International Securities Markets Association [ISMA], Security Industry Authority [SIA], and The Bond Market Association [TBMA] denouncing once again a "blatant inequity in the treatment of private and official bilateral claims." (45)

Increased Uncertainty and Diverging Objectives

In explaining the new, conflictual interplay between bilateral and private regimes, one must first consider the role of allocative tensions. That Paris Club members had significant exposure in the cases of Pakistan, Russia, and Ecuador, (46) arguably giving them a vested interest in shifting the burden onto private actors, did not escape those commercial investors demanding reverse comparability.

However, throughout the period, increased uncertainty was also a major issue: the growing diversity of actors and instruments not only affected regime strength, it also compounded traditional problems regarding lack of transparency and rendered comparisons between official and private workouts increasingly difficult. Comparing Paris Club flow restructurings with the stock-of-debt operations typical of bond markets was seen as a particularly thorny issue. (47) Also critical was the growing divergence of objectives between official creditors, preoccupied with the face value of their claims and with the debtor's debt service profile, and private creditors often more interested in secondary market valuations.

Finally, the political environment in which they operated seemed to drive public and private creditors further apart, as rising sensitivities around the use of taxpayer money, notably in the George W. Bush administration, and the perceived need to placate a public opinion increasingly distrustful of financial globalization, made private sector bail-in a political objective. The growing debate surrounding odious debt also played a role, pitting commercial approaches to debt restructuring against more "ethical" ones.

In April 2003, Krueger's statutory approach was finally shelved, having arguably fulfilled its strategic purpose: to ensure private sector consent for (comparatively benign) collective action clauses. In any case, efforts to address the conflictual interplay between official and private regimes were already under way. In the absence of new financial crises, and with the bailing-in debate in abeyance, bilateral and private creditors worked on improving communication and clarifying the norm of comparable treatment. That they did so in a more inclusive and transparent manner reflected the new environment of the late 1990s, with its fragmented private sector and closer public scrutiny.

Interplay Management: The Paris Club Takes the Lead

Following preliminary discussions in 1999, the chairman of the Paris Club met with representatives of twenty financial firms in November 2000, under the sponsorship of the IIF. April 2001 witnessed the first publicized meeting between Paris Club officials and representative firms from the private sector. In what many saw as a response to past private critiques, the Paris Club took this opportunity to unveil its new website, and to present an analysis of comparable treatment in the cases of Ecuador and Pakistan. The new turn in creditor coordination was confirmed with the adoption of the Evian approach in October 2003, the Paris Club communique stating that "coordination between official and other creditors, notably private creditors, would be particularly important." (48)

Importantly, the Evian approach seemed to address two major private concerns: first, by encouraging a discussion of the analytical framework used by the Paris Club, it went some way toward reducing uncertainty regarding comparability of treatment. Second, by allowing for the first time stock-of-debt reduction for middle-income countries, it removed a troublesome discrepancy between bilateral and private rules. Although there is little doubt that geopolitics once again played a role in the evolution of Paris Club rules, with the Iraqi case weighing heavily on official, particularly US positions, by bringing their practices closer to those of private creditors Paris Club members arguably opened up new possibilities for constructive engagement between the two sides. Yet at the time of writing, their reluctance to consider reciprocal comparability appeared undiminished, curtailing the scope for coordinated approaches.

The new engagement between bilateral and private creditors might have both reflected and contributed to a certain marginalization of the Fund in regime interplay management. The Fund's reluctance to participate in the Argentinean debt workout, if only to provide the usual balance of payments projections, led some to accuse it of encouraging a "reverse bailing out" whereby bondholders would in effect finance its operations. (49) And while the Evian approach confirmed the centrality of the Fund's debt sustainability analyses in Paris Club operations, commercial actors now openly criticized their "extreme fuzziness." (50) Interestingly, it was now the Paris Club which, by encouraging more dialogue between the IMF and private creditors around specific country cases, notably on debt sustainability hypotheses, seemed to act as honest broker between private and official sectors.


I set out to explore how the emerging literature on institutional linkages in international governance could provide a better understanding of public-private cooperation, or lack thereof, in areas characterized by the coexistence of public and private sets of norms and rules. With its long-standing mix of official and private norms and practices, sovereign debt management provided a useful testing ground.

As could be expected, at times of widespread financial crisis, the interplay between bilateral and private debt restructuring regimes tended to become more conflicting, bringing to the fore burden-sharing issues and normative inconsistencies. Yet while the 1980s saw the successful containment of allocative and normative tensions between bilateral and private creditors, post-1994 crises exposed deeper divisions. There were several factors behind the more synergetic interplay of the 1980s: allocative tensions were limited, and mitigated through a flexible use of the comparability of treatment norm; the interests and objectives of official and private actors tended to be broadly in line; and key individuals and institutions (most notably the IMF) worked across the public-private divide to promote collaborative solutions.

By contrast, the late 1990s and early 2000s saw increased tensions. These first reflected new uncertainties regarding distributional outcomes, linked to the growing diversity of actors and instruments in sovereign lending, and in particular the rise of bond financing. The latter also accounted in part for the poor alignment between bilateral and private objectives, as did the new political environment reflected in the bailing-in debate. The result was a more aggressive approach on the part of Paris Club creditors, and a confrontational response by private investors. In the process informal arrangements within and across regimes were severely tested, and IMF credibility in interplay management was impaired.

By elucidating the relations between bilateral and private creditors, a focus on the interplay between their respective regimes thus helped reach a deeper understanding of the politics of sovereign debt restructuring. But this article also attests to the fruitful contribution that emerging work on institutional linkages can make to the study of public-private governance. As transnational arrangements continue to proliferate alongside (or enmeshed with) international regimes, new means of apprehending their impact on cross-border policymaking are required. Private sets of rules do not merely compete with official ones; they interact with them in often complex ways. Because it takes as its starting point the coexistence of different sets of norms and procedures in a given issue area, and tries to capture the effects of such coexistence in a more systematic fashion, the literature on institutional interplay can help better identify the conditions for, and impediments to, effective cooperation between state and nonstate actors. As such, it deserves further consideration by all those with an interest in hybrid modes of governance.


Daphne Josselin is lecturer in international relations at the London School of Economics. She is the author of Money Politics in the New Europe and coeditor (with Professor William Wallace) of Non-State Actors in World Politics. Recent articles can be found in West European Politics, French Politics, Culture and Society, and Social Movement Studies. Her current research interests include the political economy of debt relief initiatives and the role of nonstate actors in international financial governance.

(1.) See, for example, Mathias Koenig-Archibugi, "Introduction: Institutional Diversity in Global Governance," in M. Koenig-Archibugi and M. Zurn, eds., New Modes of Governance in the Global System (Basingstoke, UK: Palgrave Macmillan, 2006), pp. 1-30.

(2.) Virginia Haufler, "Crossing the Boundary Between Public and Private," in V. Rittberger, ed., Regime Theory and International Relations (Oxford: Clarendon Press, 1993), pp. 94-111.

(3.) Ibid., p. 100.

(4.) See Kathryn C. Lavelle, "Governing Sovereign Debt: Formal and Informal Alliances in Emerging Market Financial Politics," paper presented at the annual meeting of the Canadian Association for the Study of International Development, London, Ontario, Canada, June 2005; Lee C. Buchheit. "The Role of the Official Sector in Sovereign Debt Workouts," Chicago Journal of International Law 6, no. I (2005): 333-343; Susanne Soederberg, "The Transnational Debt Architecture and Emerging Markets: The Politics of Paradoxes and Punishment." Third World Quarterly 26, no. 6 (2006): 927-949; Eric Helleiner, "The Long and Winding Road Towards a Sovereign Debt Restructuring Regime." August 2006, available at (accessed 29 January 2007).

(5.) One (policy-based) exception is Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (Washington, DC: Brookings Institution Press, 2003).

(6.) Soederberg's class-based analysis of the "transnational debt architecture" is exemplary in that respect. See Soederberg, "The Transnational Debt Architecture and Emerging Markets."

(7.) On official debt restructuring, see Thomas J. Bierstecker, "Constructing Historical Counterfactuals to Assess the Consequences of International Regimes," in T. Bierstecker, ed., Dealing with Debt (Boulder: Westview Press, 1993), pp. 315-338; Huw Evans, "Debt Relief for the Poorest Countries: Why Did It Take so Long?" Development Policy Review 17, no. 3 (1999): 267-279; Thomas Callaghy, Innovation in the Sovereign Debt Regime: From the Paris Club to Enhanced HIPC and Beyond (Washington, DC: World Bank Operations Evaluation Department, 2002); Edward Fogarty, "Moving Mountains (of Debt): NGOs, the HIPC Initiatives and the Decentralization of Multilateral Debt Governance," in V. Aggarwal and B. Granville, eds., Sovereign Debt: Origins, Crises and Restructuring (London: Royal Institute of International Affairs, 2003), pp. 229-254. On private debt restructuring, see notably Charles Lipson, "The International Organization of Third World Debt," International Organization 35, no. 4 (Fall 1981): 603-631; William R. Cline, International Debt Reexamined (Washington. DC: Institute for International Economics, 1995); Rieffel, Restructuring Sovereign Debt.

(8.) Vinod K. Aggarwal. ed., Institutional Designs for a Complex World: Bargaining Linkages, and Nesting (Ithaca: Cornell University Press, 1998).

(9.) Olav Schram Stokke, "The Interplay of International Regimes: Putting Effectiveness Theory to Work," FNI Report 14/2001 (Lysaker, Norway: Fridtjof Nansen Institute, 2001), p. 2.

(10.) Oran R. Young, The Institutional Dimensions of Environmental Change (Cambridge: MIT Press, 2002), p. 138

(11.) Stokke, "The Interplay of International Regimes," p. 11; see also Henrik Selin and Stacy D. VanDeveer, "Mapping Institutional Linkages in European Air Pollution Politics," Global Environmental Politics 3, no. 3 (August 2003): 14-46; Kal Rausliala and David G. Victor, "The Regime Complex for Plant Genetic Resources," International Organization 58, no. 2 (Spring 2004): 277-309; Karen J. Alter and Sophie Meunier, "Nested and Overlapping Regimes in the Transatlantic Banana Trade Dispute," Journal of European Public Policy 13, no. 3 (April 2006): 362-382.

(12.) It is worth noting that debtors can also take advantage of regime interplay to extract concessions from one or another set of creditors, generally leveraging their strategic significance within the Paris Club before pushing for similar concessions on the private side as in the cases of Poland in 1991 or Iraq in 2004.

(13.) Minor creditors can escape a restructuring if their claims fall below a certain level, typically SDR 1 million of principal and interest payments falling due during the consolidation period.

(14.) Christine A. Kearney, "The Clubs: London and Paris," in T. Bierstecker, ed., Dealing with Debt (Boulder: Westview Press, 1993), pp. 61-73; Benoit de la Chapelle, "Le Club de Paris et la dette mondiale depuis 1956," Regards sur Tactualiie, June 1993. Callaghy, Innovation in the Sovereign Debt Regime, p. 14, identifies another, unspoken norm, according to which debtors were expected to repay their debt in full, here reflected in the rules governing debt treatment.

(15.) On the various terms adopted by the Paris Club, see Paris Club, Fifty Years of Orderly Sovereign Debt Restructuring (Paris: Paris Club Secretariat, June 2006).

(16.) Ever since its creation in 1956, the chairmanship of the Paris Club has been assumed by the French, as has the club's secretariat.

(17.) Peter Mayer, Volker Rittberger, and Michael Zurn, "Regime Theory: State of the Art and Perspectives." in Rittberger. Regime Theory and International Relations, p. 393.

(18.) Charles Lipson. "Bankers' Dilemmas: Private Cooperation in Rescheduling Sovereign Debts," World Politics 38, no. 1 (October 1985): 215.

(19.) Rieffel, Restructuring Sovereign Debt, pp. 108-112; see also Kearney, "The Clubs," p. 67.

(20.) Anna Gelpern, "What Iraq and Argentina Might Learn from Each Other," Chicago Journal of International Law 6, no. 1 (2005): 391-414.

(21.) Lex Rieffel, The Role of the Paris Club in Managing Debt Problems, Essays in International Finance No. 61 (Princeton: International Finance Section, Princeton University. 1985); Keith Clark. "Sovereign Debt Restructuring: Parity of Treatment Between Equivalent Creditors in Relation to Comparable Debts," International Lawyer 20, no. 3 (1986): 857-865.

(22.) Evans, "Debt Relief for the Poorest Countries," p. 275.

(23.) It is worth noting, however, that the US Enterprise for Americas Initiative stipulated that up to $5 billion of official US trade debt would be eligible for relief.

(24.) Though Citibank's William Rhodes did argue that "through the Paris Club, creditor governments should lengthen their restructuring and grace periods and lower interest payments, much as the commercial banks are doing" in a letter to the Financial Times, 4 May 1990, p. 21.

(25.) Rieffel, Restructuring Sovereign Debt, p. 115.

(26.) Of the four big debtors Brazil, Mexico, Argentina, and Venezuela, only Brazil showed significant amounts of official bilateral debt in 1988: $14 billion, or 15.38 percent of all public and publicly guaranteed debt versus less than 10 percent for the other three; World Bank, Global Development Finance (Washington, DC: World Bank, 2006).

(27.) Rieffel, Restructuring Sovereign Debt, p. 301, mentions the 1977 Paris Club agreement with Zaire as the first major test of the principle of comparable treatment of commercial bank creditors.

(28.) After lengthy negotiations, they agreed to reduce Polish debt by 45 percent in March 1994, all the way denouncing this politicization of debt restructuring, The Polish deal cast a shadow over subsequent Paris Club negotiations, notably those to reschedule Russian debts; see "Moscow Seeks Fresh Debt Relief," Financial Times, 20 October 1992, p. 2.

(29.) James Boughton, Silent Revolution: The International Monetary Fund (1979-89) (Washington, DC: International Monetary Fund, 2001), pp. 1011-1012.

(30.) Fogarty, "Moving Mountains (of Debt)," p. 250.

(31.) The new approach also paved the way for debt buy backs, here again an alignment on market practice.

(32.) On debates regarding the future of the Paris Club, see the proceedings of the international policy forum convened on the occasion of the Fiftieth Anniversary of the Paris Club on 14 June 2006, available at

(33.) Institute for International Finance, Principles for Private Sector Involvement in Crisis Prevention and Resolution (2001), available at (accessed 22 April 2006), p. 7.

(34.) Institute for International Finance, Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets (2004), available at psi0101/pdf (accessed 22 April 2006).

(35.) Jacques de Larosiere, chairman of the Observatoire de l'epargne europeenne and cochairman of Eurofi, interviewed by the author, 20 December 2006.

(36.) Felix Salmon, "Bondholders Won't Back New Principles," Euromoney 35, no. 428 (December 2004): 42-46; International Monetary Fund, Progress Report to the International Monetary and Financial Committee on Crisis Resolution (Washington, DC: International Monetary Fund, 12 April 2005), p. 17.

(37.) The 1996 Rey Report had already stressed that bond debt would in all likelihood no longer qualify for preferential treatment in future debt workouts; see Group of Ten, The Resolution of Sovereign Liquidity Crisis (Washington, DC: International Monetary Fund, 1996). The "forced" Pakistani restructuring, carried out without any prior consultation, nevertheless outraged bondholders.

(38.) "Pakistan Move on Debt Delays Inevitable in Paris," Financial Times, 20 April 1999, p. 34.

(39.) Group of 7 Finance Ministers, "Report to the Cologne Economic Summit," Cologne, June 1999; available at (accessed 2 February 2007).

(40.) Nouriel Roubini and Brad Setser, Bailouts or Bail-ins: Responding to Financial Crises in Emerging Economies (Washington, DC: Institute for International Economics, 2004), p. 256.

(41.) Quoted in Brian Capien, "Paris Club Comes Under Attack," Euromoney 31, no. 377 (September 2000): 56-61.

(42.) Emerging Market Traders Association, Burden Sharing in 2001, Now Is the Time to Reform the Paris Club (2001), available at

(43.) On their arguments, see International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises--The Treatment of the Claims of Private Sector and Paris Club Creditors--Preliminary Considerations (Washington, DC: International Monetary Fund, 2001), pp. 20-21. In any case, it is far from clear that private creditors really ended up granting more favorable treatment to Ecuador.

(44.) "Letter to the Editor," Financial Times, 26 April 2002, p. 12; see also "A better way to go bust," The Economist, 30 January 2003.

(45.) Emerging Markets Creditors Association (and Emerging Market Traders Association, Institute for International Finance, IPMA, ISMA, SIA, and TMBA), "Sovereign Debt Restructuring," Discussion Draft (2002), available at (accessed 22 June 2006). It seems the International Monetary Fund was ambivalent about whether official bilateral debt should be included and left the question open in the final version of the proposal. Paris Club members, however, were adamant that the club functioned satisfactorily and should continue to handle bilateral official debt separately. See Barry Herman, "The Paris Club and the Monterrey Consensus," chair's introductory statement for the session on the Paris Club at the Debt Management and Financial Analysis Systems Conference, January 2004, available at (accessed 18 April 2006).

(46.) Roubini and Setser, Bailouts or Bail-ins, p. 256; for figures on Ecuador and Russia, see Mandeng, "Intercreditor Distribution in Sovereign Debt Restructuring," p. 7.

(47.) International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises.

(48.) Paris Club, The Evian Approach (2003), available at (accessed 25 April 2006). Since then, annual meetings have been held in addition to (more traditional) occasional meetings prior to negotiations with individual countries. The purpose of these meetings is primarily to exchange information on debt agreements that have already been concluded as well as to exchange views on forthcoming negotiations.

(49.) Jacques de Larosiere, "The Paris Club Within the International Financial Architecture," speech delivered on the occasion of the Fiftieth Anniversary of the Paris Club on 14 June 2006, available at (accessed 17 September 2006).

(50.) Felix Salmon, "Paris Club Members Adapt to New Rules," Euromoney 36, no. 437 (September 2005): 206-212.
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Date:Oct 1, 2009
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